Red tape hamstrings Greek growth

ATHENS—Canadian entrepreneur Steve Earle traveled to Greece with plans for what he hoped would be a flourishing business in a sunny, island-rich nation: a sea-plane airline.

But Mr. Earle's company, AirSea Lines, went bust five years later in 2008—hindered in large part, he says, by government bureaucracy. "They killed it by inertia," he says. "Greece is an unsustainable reality."

AirSea's odyssey illustrates one of the key problems preventing Greece from generating the economic growth it needs to pay off its heavy debts: Critics say a sprawling civil service has tried to secure its own survival through an opaque patchwork of fees, taxes and red tape. The European Commission estimates the administrative burden of Greece's bureaucracy—the value of work devoted to dealing with government-imposed administration—is equivalent to 7% of gross domestic product, twice the EU average.

That has deterred foreign investors, who could be a potential source of growth now that the Greek economy is being squeezed by austerity measures aimed at avoiding national bankruptcy. Foreign direct investment last year was €3.8 billion, or $5.1 billion—about the same as Bulgaria, a former communist neighbor with two-thirds the population of Greece, according to the United Nations Conference on Trade and Development.

Tourism is Greece's top money earner. But despite the country's magnificent coastlines and ancient monuments, many visitors are young people traveling on a shoestring. Operators trying to attract higher-end tourists say ham-handed government moves have driven business away.

This past August, for example, Athens imposed a new tax on yachts in an effort to close its budget gap. A 43-foot craft under a foreign flag was levied $5,265 a year if it had spent more than 40 days a year in Greek waters since March 2009. For a 98-foot boat, the charge was about $27,000.

The new tax "was a squeeze-the-rich measure, so they just left," withdrawing a much-needed source of crew salaries, port fees, fuel taxes and onshore spending, says Peter Custer, marketing and sales manager at Privatsea Yachting, a yacht-services firm in Athens.

A spokeswoman for the Finance Ministry said Greece is currently overhauling its tax system.

Mr. Earle, a Canadian real-estate developer, got the idea for a Greek seaplane operation from a Greek-Canadian friend, Michael Patellis, who financed oil-and-gas exploration from Vancouver. From his harbor-view office, Mr. Patellis saw the seaplanes taking off and landing every few minutes.

"I thought seaplanes would be perfect" for Greece, says Mr. Patellis, who says that on visits to family he spends about 20 hours on a boat to get from the Athens port of Piraeus to his home island, Kalymnos. Mr. Earle thought seaplanes had the potential to attract rich weekend visitors otherwise put off by interisland travel time. Of Greece's 200 or so inhabited islands, fewer than 30 have airports.

Set up in 2003, the company moved quickly, with Mr. Earle as chief executive and Mr. Patellis as managing director. It began carrying passengers in 2004. Greece's then-transport minister flew on one of its first flights. Greece's government hoped seaplanes would bring richer tourists to isolated islands, and politicians turned up to be photographed with AirSea executives at a 2006 fund-raiser.

One of AirSea's first routes was between Corfu, an established resort island, and Paxos, which has around 2,000 residents. The trip takes 90 minutes by boat, 15 on a seaplane.

The company carried about a dozen passengers six times a day. Soccer teams flew to inter-island games. Old women, dressed in black, visited family. Some Paxos restaurants changed their hours to fit flight schedules, says Mr. Earle.

At its peak, in June to September 2008, AirSea flew 11,800 passengers, using three aircraft between 12 destinations.

But soon after starting operations, company executives say they noticed how little the government, despite its initial welcome, was helping.

There was no law governing the operation of seaplanes or clear regulatory authority, so the airline had to seek permits from various ministries and local governments. Mr. Patellis says he made more than 300 trips to police stations to get official affirmations of his signature, a result of government notary requirements.

The company had to provide engineering specifications of each cleat it used at its embarkment floats to the Coast Guard, part of Greece's Merchant Marine Ministry.

Mr. Earle and Mr. Patellis say an official in the Civil Aviation Authority told them she wanted seaplane pilots to be Greek. The company began training what they say were some of Greece's first sea-plane pilots. Six months later, AirSea heard non-European pilots would be fine.

Officials at the aviation authority declined to comment. Coast Guard spokesman Lieutenant Junior Georgios Hasanidis said the ministry requires the strength of cleats to be documented.

AirSea began to turn a profit in May 2008. But the company had already used up €25 million ($30.5 million) invested in it plus an additional €2 million in revenues reinvested. When the financial crisis struck that October, an investor who had signed up to put €10 million into the company pulled out. AirSea's directors decided they couldn't carry on. The airline flew its last flight in October 2008.

Mr. Earle says the government isn't solely at fault. However, he thinks that had the company managed to become profitable earlier and expand faster, it would have weathered the economic crisis. He expressed little hope in streamlining the established bureaucracy. "Greece can make all the laws it wants," he said, but it won't make any difference if it can't execute them.

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